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100 Year Bonds – Great Yield or Sucker’s Game?

by Darwin on October 11, 2010

I’ve been seeing longer duration bonds being issued in various formats and I’m starting to wonder if this is the pinnacle of the bond bubble. Kind of like when Blackstone took private equity public at the top, is this a sign that corporate and sovereign debt is being issued one last time to the suckers before interest rates spike and they lock in the deal of the century (literally)?

Mexico Issuing 100 Year Bonds

This week, Mexico announced a 100 Year Bond with a 6.1% yield maturing in October 2110. Some see this is what happens when governments start fiddling with Quantitative Easing. See, it’s so tough to get a decent yield these days, investors are drawn further and further out on both the risk spectrum and the duration horizon just to get some decent yield. While you used to be able to buy some decent corporate bonds yielding 6% or more, now you have IBM and Microsoft issuing bonds at virtually zero – and investors are taking them!

Companies Issuing 100 Year Bonds

Believe it or not, there have been corporate 100 Year Bond issues before. Norfolk Southern issued them in both 1997 and 2005. Other major companies that have done so include Disney, Ford, Apache and Coca Cola. The coupons on those issues were normally in the 7-8% range. More recently though, Norfolk Southern just issued a century bond below 6% at 5.95%. While this is significantly above the risk-free rate on say, the 30 Year, there is no equivalent benchmark for a 100 year duration! And bonds are now being issued at 1-2 percentage points below where they were a few years back – when the economy was much more stable!

Who Buys These Things?

Since none of us would ever live to see one of these through to maturity, a natural question is who would buy a 100 year bond? It’s certainly not in the realm of easy investing to try to manage an asset that will outlive you. Typical customers are insurance companies since they operate on such long time horizons and need to match long-term liabilities with assets of similar maturity (human lives). Since the secondary market on these bonds is not as liquid as conventional shorter duration commercial paper, this can present problems for individual investors and smaller financial firms looking to unwind positions.

Companies Issuing Bonds While Already Sitting on Cash Hoards

With recent announcements from the likes of IBM and Microsoft issuing bonds while they sit on cash hoards, one can’t but wonder why. The answer lies in a few spots. First, while they’re sitting on all-time cash piles, much of that cash is parked overseas and lest they be subject to taxation when they repatriate the profits, they’re just letting that cash sit there on the sidelines until perhaps another repatriation movement comes along like what the Bush administration did in 2004. Another more concerning reason though, is that it’s great for corporations and not so great for the suckers buying them in the long run. Corporations and sovereign governments alike are pretty smart. They know interest rates are going higher – much higher, in the future. So, they’re locking in as much cash now at unnaturally low levels while they can.